China also must implement relatively loose fiscal policy to support supply-side reform and ensure medium to high-speed economic growth, Lou said at the annual U.S.-China Strategic and Economic Dialogue this week in Beijing.

China’s excess industrial capacity will have a “corrosive” impact on its future growth and efficiency unless it is reduced, U.S. Treasury Secretary Jack Lew said on Sunday, adding that it was also causing distortions in global markets.

“Implementing policies to substantially reduce production in a range of sectors suffering from over capacity, including steel and aluminium, is critical to the function and stability of international markets,” Lew said in prepared remarks at the start of the high level June 6-7 bilateral talks in Beijing.

Lou said China’s industrial over capacity issue was very much a result of its stimulus program implemented during the global financial crisis, during which China contributed to about 50 percent of world economic growth.

“Back then, the whole world applauded and gave thanks to China…now you are saying that China’s over capacity is affecting the world, why did you not say that then,” Lou said.

China cut 90 million tonnes of steel capacity last year, and will continue to cut capacity, Lou said.

Lou also said China cannot impose any hard quotas on steel capacity given that more than 52 percent of steel firms are privately owned. The government can only use market-based levers to cut capacity given that it is no longer a centrally planned economy.

China raised hope of a solution in February when it pledged to shut 100-150 million tonnes of old production capacity in five years, but actual production is expected to stay high as Beijing tries to minimise job losses – which could be in the millions – and potential social disruptions.

Lou also said there should not be too much worry about another U.S. interest rate hike, despite the fact that it could have a broad impact on financial markets, and added that the U.S. economic recovery remains fragile.

“The (Fed) rate rise issue is like a sword hanging over people’s heads…it’s impact has been largely digested by the market, so people should not worry too much about it.”